Wednesday, April 17, 2013

China's State Funds Set to Grow?

China's state pension fund has renewed its calls for an expansion of its assets under management to meet a growing need for pensions as society ages.

The fund's party secretary, Dai Xianglong, was quoted by Xinhua yesterday as saying that the central government should transfer 30 per cent of capital gains it receives from state-owned enterprises (SOEs) to the National Social Security Fund (NSSF).

The government should also transfer any of its shareholdings in SOEs in excess of 51 per cent to the pension fund, Dai said. SOEs currently assign 10 per cent of their shares to the fund during their initial public offerings.

He said the NSSF hopes its assets under management will grow to three trillion yuan (HK$3.8 trillion) by 2020 from 890 billion yuan now.

"The call highlights the pension fund's ambition to expand at a time when China has difficulty in meeting expected future pension liabilities," said Hu Xingdou, an economist at the Beijing Institute of Technology.

The NSSF, set up in 2000, serves as a strategic reserve fund for the central government to support future social security spending. It has also been entrusted with managing certain government funds for several provinces.

Started with 20 billion yuan from the Ministry of Finance, the NSSF has since grown on the back of contributions from fiscal appropriations, transfers of shares from SOEs upon their listings, lottery sales revenues and returns on its own investments, which yielded an annualised 8.41 per cent in the 11 years to 2011.

"About one-quarter of China's population will be older than 60 in 20 years, and one-third by 2050," Dai said. "The rapid pace of ageing calls for pension expenditures to grow as fast."

By 2033, the pension funding gap - the expected shortfall between provisions and disbursements - could reach 68.2 trillion yuan, or 38.7 per cent of estimated gross domestic product, if the mainland's population and pension policies remain the same, a research report by Fudan University in Shanghai concluded last year.

But the State Council has unveiled a plan to increase spending on social security. Under a directive on deepening the reform of income distribution, the cabinet said in February that SOEs would be asked to transfer an additional 5 per cent of their annual net profits to the central government by 2015, with an unspecified portion going to the NSSF.

SOEs now hand over up to 20 per cent of their profits to the central government. Last year, their contributions totalled 87.5 billion yuan, accounting for 7.9 per cent of the combined net profit of the SOEs controlled by the central government. Only 8 per cent of that sum was used to replenish the NSSF and increase other spending to improve social security last year, official data showed.

China's state pension fund has to be bolstered. The country is sliding into a pension black hole and it's ill-prepared for the demographic challenges that lie ahead.

World gold prices will pick up over time as a global economic recovery gains traction, a senior official of China's $482-billion sovereign wealth fund said on Wednesday.

Gold has fallen about 18 percent so far this year after an unbroken 12-year string of gains. It rebounded to $1,381.80 an ounce on Wednesday after tumbling to $1,321.35 the previous day.

"Gold is still the most important (component of) reserves of the economies. The fast growth of emerging market economies means that the supply of gold will not be that much," said Jin Liqun, chairman of the supervisory board of China Investment Corp.

"Gold prices should go up over the long-term," he said on Wednesday on the sidelines of a business conference, but did not give an exact timeline.

He said the current decline in gold prices would moderate if the U.S. economy recovered this year and debt distress in the euro zone economies eased.

CIC's investment exposure to gold was limited, Jin said."We invest in gold as part of investment instruments, but not on a big scale," he said. "We have been doing well on this aspect."

The company's 2011 annual report showed it had no gold investment in its portfolios.CIC is looking to invest in European companies where there is access to high-level technologies, Jin said.

"European countries have very good technology. There have well-managed companies that are having difficulties because of macroeconomic problems," he said.

CIC would also continue to explore investment opportunities in neighbouring countries in Asia and in Japan despite tension between Beijing and Tokyo, he said.

CIC, which manages a slice of China's foreign exchange reserves -- the world's largest at $3.44 trillion -- still has some cash at its disposal from its last government injection of cash in 2011, Jin said.

"We are not rushing to get more money at this moment, but eventually when we invest all of the resources. I do believe CIC will need new money in the future," he said, when asked if the sovereign wealth fund would request a new capital injection.

CIC has been very busy investing all over the world. In fact, Spiegel reports that Chinese investment in Europe hit a record high, noting the CIC acquired a 10-percent stake in London's Heathrow Airport late last year, and a 7-percent stake in the French satellite provider Eutelsat.

The WSJ recently reported the CIC will boost investment in Russia but details such as the planned investment amount and specific projects weren't mentioned. Nevertheless, the article did mention that Russian Direct Investment Fund, a state-sponsored private equity fund, and the CIC launched the joint Russia-China Investment Fund in the middle of last year to invest $1 billion in Russian private equity deals.

Investors need to track the moves of these colossal sovereign wealth funds. Headlines of a Chinese slowdown spook markets but when you see where CIC is putting its money at work, it's clear they're betting on a global recovery.

Blackstone LP is upping the ante in Asia, looking to raise the largest real-estate fund ever devoted to the region at a time when economic growth there shows signs of slowing.

The private-equity giant, which has become one of the world's biggest real-estate investors, plans to raise up to a $4 billion real-estate fund exclusively focused on China and other Asian markets, according to people with knowledge of the matter.

The target amount for the fund, which will be Blackstone's first devoted to Asia, is twice what the firm initially indicated it intended to raise. It also would be the largest Asia property fund raised, according to data tracker Preqin.

Blackstone believes there is opportunity because property values have fallen in many Asian countries as economies have cooled, say people familiar with its thinking.

The Asia fund is another sign that investors are willing to venture into emerging markets in search for yield, as interest rates are near rock bottom. Blackstone also may have sensed an opportunity in a region that many of its rivals have avoided, approached cautiously or pulled out of.

"There's not a whole lot of competition out there," said Timothy Walsh, director of the council that manages New Jersey's state pension fund, which last month committed $500 million to the new Blackstone Asia fund. "Just a few niche guys."

A Blackstone spokesman declined to comment on the new fund or fundraising in Asia. The firm is expected to provide some details about the Asia fund during its first-quarter earnings call on Thursday.

While Asian economies are among the fastest-growing in the world, offering a strong foundation for rising commercial-property prices, recent economic data has been less encouraging. Beijing said on Monday that gross domestic product growth slowed to 7.7% year over year in the first quarter. Economists say slower China growth could have a negative ripple effect throughout the Pacific Rim.

Some big U.S. pension funds that are investors in Blackstone's global funds say they aren't ready to commit to a new fund that focuses entirely on property in Asia. "We don't need to be pioneers," said Dennis MacKee, spokesman for the Florida organization that manages that state's pension fund, which has invested in two Blackstone real-estate funds. "We're a little more cautious."Still, some Asian real-estate executives already are predicting Blackstone will meet its fundraising goal."Three billion dollars to $4 billion is not a difficult target for Blackstone in Asia," said Collin Lau, former head of real estate for China Investment Corp., the country's sovereign-wealth fund, who now runs Hong Kong-based investment firm Bei Capital.

For months, executives at Blackstone have been saying Asian real estate has great potential. "It's a very important initiative for us to become the most active, opportunistic real-estate investor in Asia," said Stephen Schwarzman, Blackstone's chairman, in a January earnings call.

Similar to its global and European funds, the new Asia fund will have flexibility to invest equity in all types of properties and to buy debt, say people who have been briefed on the fund.

Blackstone generally doesn't comment on its real estate-fund returns, but according to a memo from the New Jersey pension fund, Blackstone is projecting a net annual return of 18% for its $13.3 billion global fund that concluded fundraising last year. That fund also is investing in Asian real estate. The private-equity firm is projecting a 12% return for its global fund that completed raising money near the peak of the market in 2007, according to New Jersey.

Several private-equity firms have stumbled in the region. In China, for instance, some foreign investors made aggressive bets on the country's luxury housing market in the past few years, only to get burned after the government moved to rein in excessive speculation.

A fund run by J.P. Morgan Asset Management, for example, lost a high-end apartment building in the Chinese city of Dalian to foreclosure last summer after sluggish sales put the firm in violation of loan covenants.

Some firms have exited or scaled back in the region. Bank of America Corp. sold the former Merrill Lynch Asian real-estate assets to Blackstone in 2010, while Citigroup Inc.sold its Asian real-estate investment platform to Apollo Global Management. American International Group Inc.sold its Asian fund business to Invesco in 2010.

In India, Apollo is in arbitration over one of the deals it inherited from Citigroup: an $80 million investment in Delhi developer BPTP Ltd. Citigroup had expected to exit its investment through an initial public offering but wasn't able to do that when the IPO market soured. The two sides now are disputing how BPTP should go about selling assets to repay Apollo.

Even U.S. firms that recently raised or are rolling out pan-Asian funds aren't attempting anything on the same scale as Blackstone. Angelo Gordon & Co., of New York, closed a $616 million Asian property fund. AEW Capital Management, a Boston-based real-estate investor, is raising a $500 million fund that will invest in major Asian cities, such as Singapore, Hong Kong and Seoul. LaSalle Investment Management in Chicago is looking to raise $750 million to invest in Asian property.

Blackstone began buying Asian real estate in 2006 but made equity investments of only about $102 million over its first three years in the region, according to the New Jersey memo.

Since 2010, as Asia emerged from the global economic downturn, Blackstone has stepped up the pace, making about $1.5 billion in equity investments in Asian property. It now has 48 people real-estate professionals in the region, a staff roughly the same size as it has in Europe.

When you see a private equity giant like Blackstone significantly stepping up its investments in Chinese distressed real estate, you know some kind of bottom is forming. Blackstone is plugged in with the best investors in the world and they are always first movers, jumping on opportunities at the right time.

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I am an independent senior economist and pension and investment analyst with years of experience working on the buy and sell-side. I have researched and invested in traditional and alternative asset classes at two of the largest public pension funds in Canada, the Caisse de dépôt et placement du Québec (Caisse) and the Public Sector Pension Investment Board (PSP Investments). I've also consulted the Treasury Board Secretariat of Canada on the governance of the Federal Public Service Pension Plan (2007) and been invited to speak at the Standing Committee on Finance (2009) and the Senate Standing Committee on Banking, Commerce and Trade (2010) to discuss Canada's pension system. You can follow my blog posts on your Bloomberg terminal and track me on Twitter (@PensionPulse) where I post many links to pension and investment articles as well as my market thoughts and other articles of interest.

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